Interesting post....thanks Watto as I am considering this very question myself, as are others I'm sure in the light of the level of interest, seminars, etc. on the topic
It seems to me it comes down to each individuals resources and their goals.
With buy and hold, even if +ve, there is inevitably going to be a ceiling ont he number of properties one can acquire and hold - there are only so many deposit/establishment costs that can be funded (whether by using cash or equity or a combination).
Wrapping gives you a way to go beyond this ceiling - if that was your aim.
Even then, traditional wrap strategies would still see you hit a ceiling on the number of wrap transaction you can have going at one time.
My impression is that wrapping is one technique in a suite of many that someone who wants to ramp up their property investment activity can use.
It's perhaps not a matter of one strategy only for all people, but a range of strategies for each individual, dependant on circumstances.
Some say wrapping is not really property investing - it's a finance business. As I see it, ANY transaction to do with property is a property investment. If it's true that the key to a successful wrap is buying at the right price in the first place, successful wrapping bears uncanny resemblance to other property strategies.
The way a return is released from a piece of real estate is not the issue, but rather, it is what return you release relative to other investment opportunities foregone.
of course it all depends
1/ if you use a lease option only 40% of buyers will exercise that option so this is a good instrument to use in a rising market why?...because 60% of the people will not exercise the option therefore you get the property back and the future capital growth stays with you
b/ you'll receive increased cash flow from the property under a lease option as most people pay an ongoing monthly fee in order to have the option, this inturn makes it easier to borrow more funds from financial institutions to buy more properties.
serviceability becomes less of an issue with lenders
c/ if you wrap it with an installment contract or using a lease option you may well have your buyers refinance you out in 12 months or 2 years which really accelerates your dollar return in relation to the dollars you invested.
you are giving away a lot of the future capital growth of the property in return for you getting some money now.
it's what happens next that gets exciting.
you get 20k in to get another 20-30k back .you put your 20k back in another one plus you get another one with the 20k profit you made of the last one.now repeat this over and over.
All the time your getting 350 plus a month positive cash flow per one.
now thru no fault of your own your house investing does quite rightly became a business and as such the lenders lend you lots of money to fund your business to buy these houses(because your creating them new bank customers when your people refi and your business is a profitable business)
you use some of the cash flow to buy and hold waterfronts because your cash flow houses make the payments on these not you.
now your really pumped so you go and do a few of these in new zealand and use the monthly cash flow to prove you have regular offshore earnings.
now the big aussie banks let you borrow from their asian branches like hong kong or japan where the interest rates are much cheaper
now your job as a postman is in turmoil as your always late delivering the letters because sellers start offering you they're distressed houses because they now you buy.
this all leads to the mid life crisis.......
do i leave my job or should i have stopped at one
you go to double bay and find properties for 1 million which are appraised at 1 million which don't sell because they sit on the main road or they are pink or because they don't flow right or some other insane emotional reason but nevertheless the top end of the market is fickle so the house just sits their.the seller being eaten alive by payments agrees to lease it to you for $x per month and with the right to buy it for the unpaid balance of his mortgage which happens to be about 90% of the original price he was trying to sell it for.
so now your renting and paying enough to cover his monthly mortgage an have an option to purchase this house for $900,000
with the right to sublease.
now you re lease it for monthly payments higher than yours with the buyer paying you a monthly option fee for the right to buy at 1 million which is after all the market price.
so all year u get positive cash flow , a year later u help your buying tenant refinance for the 1 mill owed to you(lenders will treat lease options as a refi)
buyer gets new loan and property in his name
u get 100k profit u had no mortgage liability no debt issues and you have a happy seller who had a problem which u solved
Right on Rick. Finally a descent post on wraps from a player and not a battling wannabee/wontabee, aka some of the previous posts, from people who have no idea!
Also, how can wraps reduce the ceiling of deposits you can fund? I thought the opposite was the case.
More posts from you please, not from theoretical armchair experts.
I was talking to this guy who needed widgets he would pay anyone $20 each. I found this factory who would sell widgets for $10 each. I phone the buyer and asked how many he wanted he said "as many as you got", I phoned the factory owner who told me she could supply "as many as I wanted". I negotiated 60 days payment terms for the factory and 30 day terms for the buyer, I then retired.
Rick, sorry to sound disbelieving but this sounds a bit too-good-to-be-true. Is what you wrote factually correct? or is it just what may be possible? You know waterfront homes that are sitting around and not selling for $1M but as soon as you move in, buyers spring up like daisies to pay you $1M.
<table border="0" cellpadding="0" cellspacing="0" >
<td colspan="2" align="center">
<p align="left"> Investment Laws</td>
<td align="right" >1st Law:</td>
<td>"What ever you don't invest you forfeit."</td>
<td align="right">2nd Law:</td>
<td>"What ever you reap is what you've sown"</td>
<td><p align="right">Jim Rohn;</td>
As I understand it, and Rick will correct me if I am wrong...
The problem is not so much with the fact that there are no buyers for the 1mil properties, but the fact that the banks will not lend to at least 20% of the population.
One well known problem which precludes you from gaining finance is a blemished CRAA. As Rick says in his seminar, if someone has made 16 mil once, the chances that they have the skills to do it again are pretty bloody good. Quite often the money was lost through no fault of their own. These are the types of people who will queue up to buy your Million dollar waterfront home from you, on a wrap, and refinance as soon as they are able. But that's good! That's when you make your back end profit!!!
And the profit, both spread and back end, is what it's about!!
(Yep Rick, see!! I did actually read your wrap manual!)
I hope this has helped, Rick will no doubt come on and give you more information, or correct me if I am wrong!
One area that interests me - debt serviceability.
You say you eventually reach a point where the banks recognise you as a business, and therefore the whole money side becomes a lot easier.
But if it takes say 10 properties (hypothetical) to reach that point, and most people have DSR issues after 3 or 4 properties, how do you move on to achieving 10?
I know you get positive cashflow, which helps, and that as it's not technically rent you should still be able to use 100% as income, but there's also the issue of "well, you're self employed in a business, but you need minimum 2 years tax returns" etc?
Is it purely a question of finding the right lender/broker?
the two above posts were separate as the first one was saying you can use your positive-cash-flow houses in where ever suburb to support your waterfronts which have high capital growth,I did not mean to say you can buy 1 million dollar water fronts that are lying around
the second post related to 1 million houses
but I forgot that everything is 1 million in sydney these days so allow me to add more detail.
with expensive suburbs we have a different type of buyer.Let's say 3million dollar houses,you'll find that the number of available buyers decrease as there are less of the affluent people available to buy these houses and as such my experience has been these residential mum and dad buyers become very picky and want everything just right.
My experience has also been unkept homes in expensive suburbs are harder to sell than unkept homes in main stream suburbs.
So if you have an unkept house in a 3million dollar suburb which looks like a plantation house or has a characteristic that makes it unusual for the area it is likely to sit longer unsold and the seller is more likely going to need to discount this house to sell it
if we can agree that sellers discount houses in order to end the pain of divorce or to move on to another house or leave the country or whatever then the following can also be agreed .
1/My experience has been that appraisals/valuations are based on logic/facts and not emotion this house is the same size as all the neighbours and therefore appraisers for 3million.
2/except residential buyers do not buy on logic they buy on emotional and the logic comes later to justify the emotional buying decision.
The people who read this site are property investors (different makeup)
ok so now the seller wants out, hates their ex or whatever and will sell this pink&black
hard to sell plantation house to you for 2.8 million.
you agree to buy but suggest that since they want out now and fast why don't you rent the house immediately which really translates to take over their payments on the house now, take care of any maintenance hassles so they're not worried by it,and settle on the house later for the agreed price.
they agree because they also no longer need to worry about a house that may have been vacant for a few months which could be an insurance issue for having extended empty premises and being left exposed to vandals.(in simplistic terms the seller is giving you vendor finance but both parties are using a lease option arrangement)
now you advertise the house, rent to own,rent to purchase etc etc etc low deposit,easy ownership 3million.
remember you've taken the house over with a lease option, your deposit to seller may be 20k which you agree he will credit back to you when you pay him out
the new purchasing tenant pays you a small 3%
down being 90k and a monthly rental of $21,203.38 which happens to be the same as a house payment on a 3million dollar house at 7% over 25 years.He has an option to purchase this house from you for the principal balance of this loan
prior to you accepting this particular purchasing tenant he has agreed for you to show his credit to your lender who offers to refi this guy after 12 months if he pays you on time.
our yuppy buyer could not get a loan at first because
a/ he spends everything he earns and didn't have a 300,000 deposit for a bank loan
b/ is self employed but hasn't been for 3 years or carn't prove income
c/spouse recently left and destroyed credit
d/permanent casual employee or on contract
e/ etc etc etc
in a year or so after the paperwork shuffle you collect your check being the difference of what you owe to the seller and what is owed to you.
Obviously the constraints of a forum is to introduce people to new ideas and not teach them a system which has many variables.This is an end play that starts with one tiny little 50-100k house somewhere and then slowly move up.
Hope I clarified my previous post-
In the market place most wrappers find that with only three mortgage insurers insuring residential home loans you'll probably get stopped at say 10-15 houses depending what product you are using.
1/ you may wish to stop at that point and buy no more and simply move these existing loans to new properties as your buyers refinance you out.Mortgage house just released to the vendor finance wraps assn at the melbourne meeting 100% home loan product which means you need no deposits and no cross collateral and they lend 100% of the cost of your purchase.
They also have a product where the wrap buyer is on the loan and not you
2/ you may wish to grow further then be moved into business banking because of the commercial loan facilities for lending
3/you'll find as you move along you will buy your properties on the best terms and not for the best price,
example....in return for the seller getting a better sales price you may ask sellers to leave say 10-20% in the deal for 12-36 months and pay them interest.... for some older people who are planning on putting the proceeds in the bank at 2% to get a lump sum now,then you pay them interest (more than the banks)each month then the balance later this is a great option.Sellers who are property investors will be open to this as well.you'll either refinance later or have your wrap buyer refinance...
4/ I also find private lenders who fund my deposits to whom i pay 15%
5/ my contracts allow me to refinance houses I have wrapped in order to get out more cash as long as i don't owe more than my wrap buyer owes me.(this may vary by state)
The idea here is to let you know as you go along you'll get exposed to many ways to cut up the pie but the trick is to just get a hold of the first slice.
Well honestly, WRAPs look very sexy to me, great cash-on-cash returns, tenants who look after the place, appears to be little downside risk. As moth is drawn to a beautiful light...I am drawn towards wraps in a similar manner, but unlike a moth, something in the back of my mind says "is this beautiful light actually bug zapper". There is a saying "god dwells in the details". Lets look at the details, lets expose the issues, pitfalls, gotcha's the problems, and of course the upside. Please understand I am not saying RickO or SteveMcN are tricksters, I am sure they are ethical moral and act with the best interests of their customers and students.
Paul, I dont know your job, but I dont need to, because I dont pretend it's easy. But please dont imagine my profession lacks "real world" edge.
I am very happy for you to have a business model that has a 400% margin. Some would be very happy to have a 3% margin. Imagine a mortgage broker if he had a ongoing 3% margin of all the loans he wrote...